A lawsuit has been filed against Wells Fargo seeking class action status to represent all borrowers whose home equity line of credit was unfairly cut based on faulty computer models that artificially deflated home values.
The Wells Fargo home equity lawsuit was filed by Michael Hickman, an Illinois homeowner, who claims that the line of credit on his property was reduced based on unreliable computer models the bank used to calculate property values following the recent decline in the housing market.
A home equity line of credit, or HELOC, is a second mortgage that allows a homeowner to borrow against the value of their home that exceeds the primary mortgage on the property. The loans are characterized by low interest rates that are often tax deductible. However, most HELOC contracts include provisions that allow the bank to reduce or eliminate the credit line if the value of the home drops below a certain point.
Wells Fargo and other lenders made home equity loans readily available to homeowners under easy and attractive terms. However, in the recent tough economic climate, banks began trying to find ways to lower exposure to potential loss and many have severely tightened credit lines.
The class action complaint, which was filed in the U.S. District Court for the Northern District of Illinois in Chicago, alleges that Wells Fargo home equity loans were illegally reduced or suspended, as they did not reappraise the property or have another “sound basis” for the credit line reduction.
Similar home equity loan reduction lawsuits are pending against Citigroup, Inc. and JPMorgan Chase & Co., according to a Los Angeles Times report.
The Wells Fargo credit line cuts came even as the bank received $25 billion in taxpayer bailouts designed to loosen up credit lines for customers. They also came as the bank acquired loans from the failed Wachovia Corp.
Hickman’s lawsuit seeks compensation of an unspecified amount, and a declaration that Wells Fargo’s home equity line of credit reductions were illegal.